Living Longer, Living Better

Posted by Andrew Leigh MP5sc on May 02, 2012

I wrote in today's Drum about the government's aged care reforms.

Choosing Life Over Money in Our Old Age, The Drum, 2 May 2012

Quiz time. Over the past 40 years, average real incomes in Australia have doubled and life expectancy has increased by a decade. If you could have only one of those developments, which would you pick? Would you prefer twice the income, or to live a decade longer?

I've asked the 'your money or your life?' question of dozens of people, and I'm yet to find anyone who would take the money. As an economist, that suggests to me that the longevity gains that have taken place in my lifetime are worth even more to Australians than the income gains.

But because Australians will live longer, policymakers need to spend more time thinking about issues that affect senior Australians. We need to boost minimum superannuation contribution rates. We must make sure our hospital system operates as efficiently as possible. And we need to fix our aged-care system.

When the Gillard Government asked the Productivity Commission to look into the care of older Australians, they reported back to us that the system was often inflexible and limited in supply, and had too many unmet needs.

Most Australians want to stay in their own homes as long as possible. But for those entering a nursing home, quality is variable and choices can be limited. The Productivity Commission pointed out that a viable solution to improving the quality of nursing homes would inevitably have to involve users paying more.

Improving the residential aged-care system involves removing some of the perverse incentives that currently exist. By significantly relaxing supply constraints on nursing home places, we are recognising the reality that more Australians will require an aged-care place in decades to come.

By requiring accommodation providers to publish their fees on a My Aged Care website (both as a daily rate and a bond), we're providing more information to consumers. And by introducing assets tests plus setting a lifetime limit on what people can be required to pay, we're making the system more equitable.

The assets tests won't apply until 2014, and if one partner is living in the family home, it will remain exempt.

Older Australians are also funding their retirement in different ways from previous generations. One of these is 'reverse mortgages'. Just as a regular mortgage allows families to live in a house while slowly paying money to the bank, a reverse mortgage lets people continue to live in a house while the bank pays them regular instalments.

A regular mortgage stops once you've paid off the house. A reverse mortgage typically ends when both members of a couple die.

At present, the market is small (a 2007 report counted just 31,000 reverse mortgages, compared with the 3 million regular mortgages). But as it grows, it's important to make sure that customers are protected. So we're improving disclosure provisions, to make sure that people who take out reverse mortgages know exactly what they're getting into. And we're placing limits on what lenders can recover, so banks cannot ask seniors to pay more than the value of their home.

It's hard to trace the origins of all the problems in our aged-care sector. Partly, they're a product of overlapping state and federal government responsibilities. There has also been plenty of political laziness, with Howard government aged-care ministers often preferring to tip a few more dollars into the system rather than consider whether the structures themselves were actually fit for purpose.

One of the big problems has been a lack of rigorous economic analysis. Sometimes, the proper role of government is to correct market failures. At other times, we need to think carefully about whether government is stifling the ability of markets to help us.

What's striking about the aged-care system is that the Productivity Commission identified both market failures and over-regulation. It's time to build a system that's more equitable, more efficient, and provides users with more choice and more control. Because as they say, living longer certainly beats the alternative.